Except For Apple The Other FAANG Companies Need To Beat And Raise To Support Their Shares

I cover technology companies, worldwide economies and the stock market

The FAANG stocks (Facebook, Amazon, Apple, Netflix and Google/Alphabet) were all strong last year. They had returns of 53%, 56%, 46%, 55% and 33%, respectively, versus the NASDAQ’s 28%. Most of them have also beaten the NASDAQ so far this year with Facebook being the weakest with only a 1.6% increase due to concerns about its Timeline undergoing changes (but was up 6.4% as of Thursday). (Note that I own Apple shares and have sold Put options).

Investors are paying up for growth companies and the FAANG stocks fit that to a T. However due to their stock price increases all but Apple at 15x have high PE multiples. Facebook and Google/Alphabet’s are 27x calendar 2018 earnings while Amazon’s is at 164x and Netflix’s is 97x.

Investors are betting that earnings growth will continue at or close to the rates they have experienced and in the worst case the stocks will “grow into their multiples” meaning that earnings will grow so fast that the PE multiple will decrease. Stock prices could continue to rise under this scenario but at a slower rate than earnings growth.

Facebook’s margins are forecast to decline

Facebook is forecast to grow its revenue faster than its EPS (30%’s for revenue vs. teen’s for EPS) while its 2018 PE multiple is 27x. These numbers indicate that margins should shrink this year.

PEG or PE multiple to Growth rate is a common valuation metric for high growth companies. An example would be a stock having a PE multiple of 30x and an earnings growth rate of 20%. That stock would have a PEG of 1.5x.

A PEG of 1 tends to be the over/under especially for high growth companies. If it is above 1 then the PE multiple is higher than the growth rate and the stock could be viewed as overvalued. If the PEG is below 1 then it could be viewed as being undervalued. There are many other factors that come into play when valuing a stock, PEG is just one of them. Below are Facebook’s revenue and EPS for the March quarter and full year. I’ve also included other metrics on the shares.

March quarter revenue growth from $8.03 billion in 2017 to $11.08 billion, up 38%

March quarter revenue growth from $35.7 billion in 2017 to $48.6 billion, up 36%

2018 revenue growth from $177 billion to $229 billion, up 29%

1Q EPS from $1.48 to $1.72, up 16%

2018 EPS from $4.33 to $7.95, up 84%

Current stock price of $1,305 has a 164x PE multiple on 2018 EPS

PEG is 2.0x

Average price target of $1308 equals the current price

Apple’s PE multiple is below the market’s multiple

Apple’s PE multiple of 15.4X is by far the most reasonable of the group which is due to it having the largest market cap and the lowest growth rate over a multi-year timeframe. For 2018 its revenue and earnings are taking significant jumps vs. last year but should ratchet back down in 2019. This creates the situation that its PEG is less than 1x but it should move higher in 2019.

March quarter revenue growth from $52.9 billion in 2017 to $68.8 billion, up 30%

2018 revenue growth from $229 billion to $274 billion, up 20%

1Q EPS from $2.10 to $2.92, up 39%

2018 EPS from $9.21 to $11.46, up 24%

Current stock price of $177 has a 15x PE multiple on 2018 EPS

PEG is 0.6x

Average price target of $186 is 5% higher than the current price

Netflix is positioned to leverage its revenue growth

Netflix’s earnings are expected to grow faster than its revenue much like Amazon’s. Due to its international expansion and ability to increase its monthly subscription price investors are willing to pay up for the shares.

March quarter revenue growth from $2.64 billion in 2017 to $3.49 billion, up 32%

2018 revenue growth from $11.7 billion to $15 billion, up 28%

1Q EPS from $0.40 to $0.55, up 38%

2018 EPS from $1.25 to $2.29, up 83%

Current stock price of $221 has a 97x PE multiple on 2018 EPS

PEG is 1.2x

Average price target of $217 is LOWER than the current price

Google/Alphabet continues to dominate

For the year analysts are expecting Alphabet to increase its operating margins as revenue climbs 19% but EPS moves up by 29%. YouTube is becoming a larger and larger contributor for the company.

March quarter revenue growth from $24.8 billion in 2017 to $29.7 billion, up 20%

2018 revenue growth from $110 to $131 billion, up 19%

1Q EPS from $7.73 to $9.25, up 20%

2018 EPS from $32.32 to $41.58, up 29%

Current stock price of $1,131 has a 27x PE multiple on 2018 EPS

PEG is 1.4x

Average price target of $1,189 is 5% higher than the current price

Price targets vs. current prices

As can be seen in the price targets vs. their current ones many analysts for Amazon and Netflix will either have to raise their projections or downgrade the shares. Amazon’s average price target is equal to its current price while 43 of 47 analysts have Buys or Strong Buys on the shares. For Netflix the price target is below the current price and 27 of 41 analysts have Buys or Strong Buys.

It isn’t surprising that the analysts have “fallen behind the curve” on their estimates and ratings vs. the companies current stock prices especially with the December quarter announcements a few weeks away. Most don’t want to be increasing their valuation metrics to keep a rating or find a reason to increase their revenue and EPS projections close to when they get information about the past quarter and guidance for the future.

I provide independent research of technology companies and was previously one of two analysts that determined the technology holdings for Atlantic Trust (Invesco's high net worth group), a firm with $15 billion under management. Before joining Atlantic Trust I was the Intern...